London, November 23rd, 2016
Fundamental Review of the Trading Book
(FRTB)
http://www.bis.org/bcbs/publ/d352.pdf
Arnaud Sandrin Symposium
London, November 23rd, 2016
Arnaud Sandrin
Any views expressed in this presentation are those of
the author only, and not those of Autorité de Contrôle
Prudentiel et de Résolution nor Banque de France.
Arnaud Sandrin
Contents
1. Brief introduction to FRTB
The new Trading Book / Banking Book boundary
Internal Models Approach
Standardised Approach
2. Focus on P&L Attribution
3. Focus on SbM, interactions with SIMM
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Milestones
Beginning of the FRTB: 2009
Three consultative documents: 2012, 2013, 2014
Publication of the final standards: 14 January 2016
Transposition in the national rules: 1 January 2019
First reporting date: 31 December 2019
FAQs are being developed
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Boundary trading book / banking book
Definition of the boundary on an instrument basis
Trading-intent
Presumptive lists
Accounting trading asset or liability → trading book
Market-making → trading book
Real estate holdings → banking book (eg)
Switching limits
Capital arbitrage mitigation
Supervisory re-designation
Daily fair-valuation required for trading book
Better reporting
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Internal Models Approach
97.5% Expected Shortfall (ES) – tail risk
Single, stressed measure – procyclicality
Varying liquidity horizons
Constrained diversification effects
Validation at desk level
Backtesting
P&L Attribution
Risk factor modellability
Default risk charge
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Standardised Approach
Sensitivities-based Method
Delta, vega, curvature (≈ stress test on non-linear risks)
Prescribed risk weights and correlations
Residual Risks Add-on
1,0% exotic
0.1% other residual risks
Default Risk Charge
Securitisation
Correlation Trading Portfolio (CTP)
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Contents
1. Brief introduction to FRTB
The new Trading Book / Banking Book boundary
Internal Models Approach
Standardised Approach
2. Focus on P&L Attribution
3. Focus on SbM, interactions with SIMM
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P&L Attribution: requirements
Comparison between two P&Ls
𝑅𝑇: risk-theoretical P&L
𝐻: hypothetical P&L
First ratio
−10% <𝜇 𝑅𝑇−𝐻
𝜎𝐻< 10%
Second ratio
𝜎2 𝑅𝑇−𝐻
𝜎2𝐻< 20%
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P&L Attribution and model validation (1/2)
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Standardised approach
for entire trading book
Fail
Step 2(i)
Banks nominate which trading desks
are in-scope for model approval and
which are out-of-scope
Step 2(ii)
Assessment of trading desk-level
model performance against
quantitative criteria (P&L attribution,
backtesting)
Standardised approach
for specific trading
desks
Pass
Pass
Fail
Out of
scope
Step 3
Individual risk factor analysis
Frequency of update
Available historical data
Other factors
Global ES with
diversification
constraints
Capital add-on based on
stress scenario per risk
factor
Capital charge for
default risk
Modellable
Non-modellable
Step 1
Overall assessment the banks’
firm-wide internal risk capital
model
P&L Attribution and model validation (1/2)
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Standardised approach
for entire trading book
Fail
Step 2(i)
Banks nominate which trading desks
are in-scope for model approval and
which are out-of-scope
Step 2(ii)
Assessment of trading desk-level
model performance against
quantitative criteria (P&L attribution,
backtesting)
Standardised approach
for specific trading
desks
Pass
Pass
Fail
Out of
scope
Step 3
Individual risk factor analysis
Frequency of update
Available historical data
Other factors
Global ES with
diversification
constraints
Capital add-on based on
stress scenario per risk
factor
Capital charge for
default risk
Modellable
Non-modellable
Step 1
Overall assessment the banks’
firm-wide internal risk capital
model
“For a risk factor to be classified as modellable by a
bank, there must be continuously available “real”
prices for a sufficient set of representative
transactions. A price will be considered “real” if:
• It is a price at which the institution has conducted a
transaction;
• It is a verifiable price for an actual transaction
between other arms-length parties; or
• The price is obtained from a committed quote.
• If the price is obtained from a third-party vendor,
where: (i) the transaction has been processed
through the vendor; (ii) the vendor agrees to
provide evidence of the transaction to supervisors
upon request; and (iii) the price meets the three
criteria immediately listed above, then it is
considered to be real for the purposes of the
modellable classification.” Source: Extract from FRTB, §183(c)
Contents
1. Brief introduction to FRTB
The new Trading Book / Banking Book boundary
Internal Models Approach
Standardised Approach
2. Focus on P&L Attribution
3. Focus on SbM, interactions with SIMM
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SIMM and SbM
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Source: Extract from FRTB, §51 Source: Extract from SIMM, §9
Link:
http://www2.isda.org/attachment/ODY2OA==/ISDA_SI
MM_vR1.0_(PUBLIC).pdf
Two similar approaches
Opportunities and challenges
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Opportunities
A unique global market risk measure
Standardisation of sensitivities
Standardisation of model inputs (common definitions)
Challenges
Model risk
Global supervision / governance of SIMM and SbM
Many thanks for your attention
Arnaud Sandrin